Mahindra Finance Q1 Results Review - Weak Performance; Lower Provisions Drive Beat In Earnings: Systematix

ICICI Securities Report

Mahindra and Mahindra Financial Services Ltd. operating performance was below expectation with net interest income/ OP at Rs 17.8 billion/ 11.3 billion versus estimate of Rs 18.6 billion/ 11.8 billion.

However, with lower-than-expected provisions, earnings came in above estimates. Net interest income grew by a moderate 12% due to ~40 basis points contraction in net interest margin and slightly lower assets under management growth (22.6% YoY).

Elections led disruptions, heatwave and floods have impacted disbursements during the quarter resulting in just ~5% YoY growth.

Overall stressed assets pool (Stage 2 + Stage 3) increased QoQ to 9.7% (versus 8.4% in Q4 FY24) due to seasonality. Gross stage-III asset ratio inched up by 16 basis points QoQ and net stage-III asset ratio inched up by 18 basis points QoQ. Coverage on stage 3 ECL declined to 59.8% (versus 63.2% in Q4 FY24 and 60.1% in Q1 FY24).

Management expects provision reversal in upcoming quarters and lower opex to drive return on assets (2.2% guidance for FY25 versus 1.8% in Q1), as margins remain in a tight spot due to rising cost of funds. We believe it is going to be a tightrope walk for the company.

At current market price the stock is trading at 1.7 times FY26 book value with return on assets and return on equity of 2.2%/ 15.3%. We maintain our 'Hold' rating, with a target price of Rs 275, valuing the company at ~1.5x FY26E book value.

Key risks: Continued slow down in underlying vehicle sales growth and further pressure on cost of funds can continue to impact growth and profitability.

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